Inventory Management

Inventory Management
Chapter 7
Dr. Umar Farooq

GIK Institute, Pakistan
Quiz 2
Date: 05–03-2020 (Thursday)

Time: 7:30 pm
Contents: Chapters 5, 6, 7
Inventory Management
• Inventory: A stock of items held to meet future demand.
• Inventory Management: A physical resource that a firm
holds in stock with the intent of selling it or transforming it into
a more valuable state.
Introduction
• Inventory can be one of the most expensive assets of
an organization.
The Functions and Basic Types of
InvenRtevoenrueyfro the inventory consist
of mostly goods for
the restaurants.
m hotel
room and gaming
sales is excluded
Introduction
Why do we care?
Inventory is one of the
biggest corporate assets ($).
On average approximately 60% of current
assets in companies are in term of inventory.
Enormous potential for efficiency increase
by controlling inventories.
10 to 20% of inventory can be reduced

without any adverse effect on production
and sales by using simple inventory
planning and control techniques
Introduction
• Managing over-stock and stock-out is a complex
problem.
• Basic issues are simple… how much to order and when
to order.
• Additional issues are… where to store inventory and what
items to order.
• Traditionally, conflicts were usually present…as
customer service levels increased, investment in
inventory also increased.
• Recent emphasis is on increasing customer service and
reducing inventory investment.
Introduction
• The firm can achieve higher levels of customer
service without actually increasing inventory:
 More responsive order processing
 Ability to strategically manage logistics data
 More capable and reliable transportation
 Improvements in the location of inventory
Matching Supply & Demand
• Suppliers must find ways to
better match supply & demand
to achieve optimal levels of
cost, quality, & customer
service to enable them to
compete with other supply
chains.
• Suppliers must accurately
forecast demand so they can
produce & deliver the right
quantities at the right time at
the right cost.
Dependent & Independent Demand
• Inventory management models are based on the type of inventory being
considered;
 Dependant Demand
 Independent Demand
• Dependent Demand
 The internal demand for parts based on the demand of the final
product in which the parts are used. Subassemblies, components, &
raw materials are examples of dependent demand items.
 Example: 120 vehicles will be produced in January. The firm thus
knows that 120 handlebars and 480 wheel rims will be needed.
• Independent Demand
• The demand for final products & has a demand pattern affected by
trends, seasonal patterns, & general market conditions (External
Factors).
 Example: The demand for a vehicle is independent demand.
• The replacement batteries, headlights, seals and gas-kits sold as
service parts to the repair shops or end users are considered as
independent demand.
The Functions and Basic Types of Inventory
Functions of Inventory
•The primary functions of inventory are to:
– Buffer: Type of Inventory to deal with uncertainty in the
marketplace (e.g., safety stock)
– Decouple Type of Inventory to deal with breakdowns or un-
evenness between operations or workstations.
• Example: An appropriate amount of inventory, known as safety
stock or buffer stock, can be used to cushion uncertainties due
to fluctuation in supply, demand and/or delivery lead time.
• Where safety stock is seen as a buffer against increased external
demand,
• Decoupling inventory is the buffer against increased internal
demand.
Inventory
Bill of Materials (BOM):
An engineering document
that shows an inclusive
listing of all component
parts and assemblies
making up the final
product.
Categories of Inventory
• Four broad categories of inventories
• Raw Materials: Unprocessed purchased inputs or materials for
manufacturing the finished goods.
• Work-in-process (WIP): Semi-manufactured products or
materials that are partially processed but not yet ready for sales.
• Finished goods are completed products ready for shipment.
• Maintenance, repair and operating (MRO) supplies are materials
and supplies used when producing the products but are not parts of the
products.
Inventory
Work in
process Customer
Supplier
Raw Work in Finished
Material process Goods
Work in
process
Inventory
• Inventory Costs
• The bottom line of effective inventory management is to control
inventory costs and minimize stock-outs.
• Direct costs are those that are directly traceable to the unit produced.
– E.g. amount of materials and labor cost.
• Indirect costs are those that cannot be traced directly to the unit
produced.
– E.g. Maintenance, repair, lighting; buildings; and
security.
• Fixed costs are independent of the output quantity (Security,
Insurance)
• Variable costs change as a function of the output level.
– (Material cost)
Inventory
• Sunk costs are costs that have already been incurred and cannot be
recovered or reversed.
– E.g. Buildings, equipment, plant security, heating and lighting
• Order costs are the variable costs associated with placing an order
with the supplier.
• Holding or carrying costs are the costs incurred for holding
inventory in storage.
– E.g. handling charges, warehousing expenses, insurance
• Setup costs are associated with setting up machines and equipment to
produce a batch of product.
• Key Focus of inventory management is to control variable costs

since fixed costs are generally considered sunk costs.
Inventory Investment
• Inventory is expensive and it ties up a firm’s working capital.
• Inventory requires storage space and incurs other carrying costs.
• Some products require special handling and storage that add to the
cost of holding inventory.
• Firms should diligently measure inventory investment to ensure that
it does not adversely affect competitiveness.
• Measures include:
• Absolute value of inventory (physical stock counts)
• Inventory turnover ratio- how efficiently a firm is using its
inventory to generate revenue!
Cost of Revenue (cost of goods sold)

Inventory Turnover Ratio =
Average Inventory
(Beginning-
• Inventory Control
• Inventory control is the systematic control and
regulation of purchase, storage and usage of
materials.
 To maintain an even flow of production;
 To avoid excessive investment in materials.
Large amount of inventory leads to considerable
lapse of fund
Inventory Control Methods
• Min-max Plan
• The Two-bin System
• Order Cycling System
• ABC Analysis
• Min–Max Plan:
• Set up one or two thresholds, with
bottom one called Min and the
top one called Max.
• Thresholds can be static or
dynamic.
• Dynamic Min-Max has the ability
to react to sales changes.
• When the inventory level for an
item (on-hand quantities plus
quantities on order) drops below
the minimum, Oracle Inventory
suggests a new purchase
requisition
• Two Bin Inventory System:
• Two-bin inventory control involves the storage of goods
in two bins,
o one of which contains working stock and
o the other containing reserve stock.
• The amount of inventory kept in the reserve stock bin
equals the amount the company expects to use during
the ordering lead time associated with that item.
• Reserve bin quantity = (Daily usage rate × Lead
time)
+ Safety stock
• To use this system, reorder goods as soon as the working
stock bin is empty, and replacement parts should arrive
before the reserve stock bin is empty.
• Order cycle System: Inventory checks at set intervals (e.g.
30 days) and reorder products that are likely to run out by the
next check.
• Physically counting inventory on a periodic basis.
• The ABC Inventory Control System
• The ABC Inventory Control System is applied by those firms that
have to maintain several types of inventories.
• Sometimes it is not required to keep the same degree of control over
all the inventory types, since each vary in terms of its value of
annual consumption.
• The ABC Inventory analysis can assist in identifying obsolete
stocks.
• To analyze whether a company is stocking the correct
inventory
The ABC Inventory Control
•
System
ABC analysis is an inventory categorization
method which consists in dividing items into
three categories (A, B, C):
– A being the most valuable items,
– B being the second most valuable items.
– C being the least valuable ones.
• This method aims to draw managers’
attention on the critical few (A-items) not on
the trivial many (C-items).
The ABC Inventory Control System
• ABC analysis is based on Pareto
Principal
• The Pareto principle
• VILFREDO PARETO 80/20 Rule/
Law of few
• Pareto noticed that 80% of Italy's land
was owned by 20% of the
population.
• He then carried out surveys on a
variety of other countries and found to
his surprise that a similar distribution
applied.
 20% of population owns 80% of
nations wealth
 20% of employees cause 80% of
problems
 20% of items accounts for 80% of
The Pareto principle – Practical
Examples
• Microsoft noted that by fixing the top 20% of the most-
reported bugs, 80% of the related errors and crashes in a
given system would be eliminated.
• In load testing, it is also common practice to estimate that
80% of the traffic will occur during a particular 20% of the
total time period.
• In Sports, roughly 20% of the exercises and habits have 80%
of the impact and the trainee should not focus so much on a
varied training.
• Assuming 20% of the hazards account for 80% of the
injuries.
Groups inventory as A, B, & C categories or Items;
 A items are given the highest priority. A

items account for approximately 20 % of the
total items, are about 80 % of the total
inventory cost
 B & C account for the other 80% of total
items & only 20% of costs. The B items
require closer management since they are
relatively more expensive (per unit) than C
items.
 C items have the lowest priority
Establish strategies to focus on few critical parts not on the ordinary
parts
• A class items need continuous rigorous control.
• B class items relax control (predictive review)
• C class items simple rule of thumbs
• The ABC Inventory Matrix
• The ABC Inventory analysis can assist in identifying obsolete stocks
and to analyze whether a company is stocking the correct inventory by
comparing two ABC analyses.
• First, an ABC analysis is completed based on annual inventory
dollar usage.
• Second ABC analysis is performed based on current inventory
dollar value.
• Finally, the two ABC analyses are combined to form an ABC
inventory matrix.
• The A items based on current inventory value should match the A
items based on annual inventory dollar usage.
• Similarly, the B and C items should match when comparing the two
ABC analyses.
• Otherwise, the company is stocking the wrong items.
• ABC Analysis -- classify inventory into 3 groups
according to its annual dollar usage.
• Annual dollar usage = annual demand * cost
The ABC Inventory Matrix
ABC Analysis Based on Total Annual
Usage
67 %
28
%
ABC Analysis - Current Inventory Usage
The ABC Inventory Matrix
• Each inventory item is plotted on the matrix using the
“percent of total current inventory” on the horizontal
axis and the “percent of total annual dollar usage”
on the vertical axis.
• Vertical axis ranges from 0.4 percent to 35.2 percent,
• horizontal axis ranges from 0.2 percent to 40.5
percent.
• For instance, the coordinate of the item “T519”
would be (40.5, 0.4).
• Thus “T519” falls on the extreme lower-right corner
of the matrix.
• Six of the inventory items fell along the diagonal, suggesting the
appropriate stocking levels.
• The company has probably overstocked items “T519” and “L227”
and understocked “N376” and possibly “R116”
INVENTORY MODELS
• To Minimize the total inventory cost
• How much to order?

• When to order?
INVENTORY MODELS
INVENTORY MODELS
• Inventory models has two categorize:

 The deterministic inventory models
To find out the answer of “how much to
order?”
 The statistical reorder point
 To find out the answer of
“when to order?”
INVENTORY MODELS
• Deterministic inventory models
• Assume demand, delivery lead time and other parameters are
deterministic.
o These variables are known with certainty and remains
constant
• Models use fixed parameters to derive the optimum order

quantity to minimize total inventory costs. E.g. Auto reorder -
point
• Also known as the fixed order quantity models.
1. Economic Order Quantity (EOQ)
2. Economic Production Quantity (EPQ)
Economic Order Quantity
Economic Order Quantity (EOQ)
• Determine the optimal order size that minimizes total annual
inventory costs.
 Inventory Costs
Annual order cost + Annual inventory holding cost
 Main Decision Point
Trade-off between;
Order cost & Inventory holding cost
As
Other parameters (demand and lead-time) are
constant
• When the order size for an item is small
 Orders have to be placed on a frequent basis
 Causing high order cost
 The firm then has a low average inventory level
 Low annual inventory holding costs
• When the order size for an item is large
 Orders are placed less frequently,
 Causing lower order costs.
 Causes inventory level to be high,
 Resulting in higher expenses to hold the inventory.
Why Holding Costs Increase
• More units must be stored if more are
ordered
Purchase Order Purchase Order

Description Qty. Description Qty.
Microwave 1 Microwave
1000
Order quantity Order quantity
Why Order Costs Decrease
• If we order more frequently, then we Order cost $10
order fewer times over the year.
• Example: You expect to order 10
Purchase Order
microwave ovens over a year for a retail Description Qty.
store like Sears. It cost $10 to place an Microwave 1
order.
 If you order 1 microwave in a single order,

how many orders will you place over the Order Cost $10
year? what is the ordering cost? What is Purchase Order
the ordering cost per microwave?
Description Qty.
 If you order 10 microwaves in one order, Microwave 10
how many orders will you place over
the year? What is the ordering cost?
What is the ordering cost per
Total Cost = Holding Cost + Order Cost
Annual cost (dollars)
Holding cost (HC)
Ordering cost (OC)
Lot Size (Q)

• Assumptions of the EOQ Model
 The demand is constant
o 365 days per year and the annual demand is 730 units
 Order lead time is constant
o Delivery lead time is ten days, every delivery will arrive
exactly ten days after the order is placed
 Replenishment is instantaneous (in single complete
lot)
o Entire order is delivered at one time. Partial shipments are
not allowed.
Price is constant. Discounts are not allowed
 The holding cost is known.
 Order placing cost of one order is constant.
Lets Find out the Formula of EOQ
Remember!
How Much to Order?
When to Order?
o D = Annual Demand (Units/year)

o S = Cost of placing Order ( Cost/order)
o H = Holding cost/unit/year
o Q = Order Quantity
• Total Cost = Holding Cost + Order Cost

• Annual Cost of inventory = Annual Holding Cost + Annual Order cost
• Only ordering and holding costs need to be

minimized (all other costs are assumed
constant).
• As Q (order quantity) increases:
 Holding cost increases
 Ordering cost decreases
• Annual Order Cost
The number of orders placed/year × Cost of Placing one order
The number of orders placed/year = D/Q

Total Annual Order Cost = D/ Q ×
S
= (D/Q) S
• Annual Holding/Carrying Cost
Annual Holding Cost = Total annual Inventory × Holding cost/unit
• But inventory level continuously decreasing from maximum to

minimum throughout the year. So, instead of using annual inventory
(hold), we will use annual average inventory (hold)
• Annual Holding Cost = Average annual Inventory × Holding

Cost/unit
• Annual Holding Cost = Q/2 × H = (Q/2) H
Total Cost = Total annual Holding Cost + Total Annual Order Cost
TC = (D/Q) S + (Q/2) H
EOQ occurs when

Total Annual Ordering Cost = Total Annual Holding Cost
(D/Q) S = (Q/2) H
Q =
√2DS/H
3000 —
Total cost = Q D
2 (H) + Q (S)
2000 —
Q
Holding cost = 2 (H)
1000 —
Ordering cost = DQ(S)
0— | | | | | | | |
50 100 150 200 250 300 350 400
Optimal Quantity (Q) Lot Size
Gift Shop
• A museum of natural history is having problems
managing their inventories. Low inventory turnover is
squeezing profit margins and causing cash-flow
problems.
• An item, a birdfeeder is also a top-selling item.

 Sales:18 units/weak
 Purchase cost: $60
 Order cost: $45/order
 Annual holding cost: 25% of purchase cost
 52-week year
• Management has been ordering currently in lots of

Economic Order Quantity-Example
D = 18 × 52 = 936/year
Q = 390/order
S = 45/order
H = 0.25 × 60
=
$15/unit/year
T
C
=
T C  3033
(
Total Cost for Q = 390
Current
Cost
(3033)
3
0
0
0
—
Holding cost
T = 2Q (H)
o
t
1000 — a
l
c Ordering cost = D (S)
Q
o
s
0— t | | | | | | | |
50 100 150 200 250 300 350 400
=
Current
Q Lot Size (Q)
Q (390)
Economic Order Quantity- Q*
2DS D = 18 × 52 = 936/year
Q = 390/order
Q* S = 45/order
 H H = 0.25 × 60 = $15/unit/year
2(936)(45)
Q*
 1
5
 74.94  75units /
order
Total Cost of Economic Order
Quantity (EOQ) – Q*
D Q*
TC  S H
Q*
2
936 75
TC  45  15
75
When Q = 390 2 When Q = 75

TC =TC 1124.10 TC = 1124.10
3033
How Much to Order?

When to Order?
 When to order?
• Reorder point (ROP)
• After Q* is determined, the second decision is when
to order.
• Orders must usually be placed before inventory reaches
0 due to order lead time
• Lead time is the time from placing the order until it
is received
• The reorder point (ROP) depends on the lead time
(L)
Reorder point
Order
received
On-hand inventory
OH
R
Order
placed
Re-order
point
L
TBO
• Reorder Point Example
• Assume lead time, L = 3 business days
• Annual Demand d = 1000 pumps
• Assume 250 business days per year
• Then daily demand,
d = 1000 pumps/250 days = 4 pumps per day
Reorder Point = Daily Demand × Lead Time
ROP = (4 pumps per day) x (3 days)
= 12 pumps
Economic Production Quantity
• Economic Production Quantity (EPQ) or Production Order Quantity
(POQ) model is another variation of the classic EOQ model.
• It finds out the optimal production lot size.
• It relaxes the instantaneous replenishment assumption by allowing

usage or partial delivery during production.
• The EPQ model is especially appropriate for a manufacturing
environment where items are being manufactured and consumed
simultaneously.
• In some situations the company has to produce their supplies
internally instead of ordering from outside suppliers.
• In such cases we use the optimal lot size which minimizes
the total
cost.
• Assumptions
 Known and constant demand
 Known and constant lead time
 No quantity discounts. i.e. Quantity is
Constant
 Only setup cost and holding cost
 Partial receipt of material
 Inventory builds up gradually during the production
period rather than at once as in the EOQ model.
• EPQ is used where manufacturers produced their own
inventory to be used for final product manufacturing.
 P = Production rate/day
 d = demand(consumption)/day
• Normally the production rate should be greater than the
demand or consumption rate. P>D
• Lets say
 P = 50
 d = 40
 Accumulating Quantity = P – d = 50 – 40 = 10 units
• These 10 Units will be inventory build-up to be consumed
until the next production cycle
Production rate = 50 Demand = 40
Consumption
Accumulation
Production &
Units Usage
(Q)
30
20
10
1 2 3 30 Time (t)
Batch 1 Batch 2 Batch 1 Batch 2

 Decision Point
• What is the appropriate production run size?
• Larger the production run
o then larger the Inventory becomes
o larger the Holding cost
o fewer the Setup cost
• Smaller Production run
o Lesser Inventory level
o Lesser Holding cost
o Higher setup cost
• So, find the tradeoff point between setup cost and
holding cost
Economic Order Quantity (EOQ)
Lets Calculate EPQ
Remember
How much to Produce?
How Long to
Produce?
(EPQ)
o Remember EOQ;
o D = Annual Demand (Units/year)
o S = Cost of placing Order ( Cost/order)
o H = Holding cost/unit/year
o Q = Order Quantity
(EPQ)
• D = Annual Demand
• Q = Production Quantity/Batch
• P = Production rate/Day
• d = daily usage rate or demand rate
• C = Setup cost of equipment for one batch
• H = Holding cost/ unit
• Only one item is involved
• Usage occurs continually
Total Cost = Total annual Holding Cost + Total Annual Setup Cost
Total Cost = Total Setup Cost + Total Holding Cost
We have to find out;

• Total holding Cost
• Total Setup Cost
Total Setup Cost = Number of Production run(batches) × Setup

cost
So,
Number of Production run = Annual Demand / Quantity per batch

= D/Q
Total Cost = Total Holding Cost + Total Setup Cost
Total Holding Cost =Average Inventory × Holding cost per unit
Average inventory = Maximum inventory/2

• In EOQ model the holding cost based on average inventory.
• Average inventory = Q/2
Imax
Units
(Q)
Average inventory
30
20
10
1 2 3 30
Time (t)
Production Production=Q/P Accumulating Production run

run
Imax = Maximum inventory
Average inventory = Imax /2

• Average inventory = Maximum inventory/2
• Maximum Inventory =
Number of days in production run × Accumulating Quantity
• Number of days in production run =
Production Quantity per batch/ Production rate = Q/P
• Accumulating Quantity = Production – Usage
= (P – d)
• Maximum Inventory = Q/P × (P-d)
• Average inventory = ½ [Q/P × (P-d)]

Total Holding Cost =Average Inventory × Holding cost per unit
= ½ [Q/P × (P-d)] × H
As at EPQ level,
Total Setup cost = Total Holding cost
(D/Q) × C = ½ [Q/P × (P-d)] × H
∗ 𝟐𝑫𝑪
Q =
[𝑯 𝟏 −𝑷𝒅 ]
Annual Consumer Demand = 10,000 Units D
Annual internal inventory demand = 1000 / 250 = d
1000units Setup Cost = $10 per setup C
Holding cost = $ 0.5 per unit per year
Daily production = 8 units per day H
Operations days per year = 250 unit per day
1. What will be the optimum production quantity? P (Q*)
2. Total Annual Cost at optimal quantity? (TC)
A plant manager of a chemical plant must determine
the lot size for a particular chemical that has a
steady demand of 30 barrels/day. The production
rate is 190 barrels/day, annual demand is 10,500
barrels, setup cost is $200, annual holding cost is
$0.21/barrel, and the plant operates 350 days/year.
Determine the production order quantity.
HOW much to produce?

How long to Produce?
• Length of the Production Cycle
• The production cycle will last until Q* units have
been produced.
• Producing at a rate of p units per day means that it
will last for (Q*/p) days
• How long to produce = (Q*/p)
Q* = 4000 units
p
= 80 units per day

= 4000 / 80 = 50 days
Quantity Discount Model
• The quantity discount model is one of the variety of
EOQ model.
• It relaxes the constant price assumption by allowing
purchase quantity discounts.
• The unit price of an item is allowed to vary with the
order size (Quantity).
• Unlike the EOQ model, the annual purchase cost now becomes an
important factor in determining the optimal order size.
• The quantity discount model must consider the trade-off between
purchasing in larger quantities and the higher costs of holding
inventory.
• The purchase price per unit, is no longer constant.
• So, the total cost must include;
• Total Annual inventory Cost =
Annual Purchase Cost + Annual Holding Cost + Annual Order

Cost
• In EOQ Model;
Annual Order Cost + Annual Holding Cost + Annual Purchase Cost
 D     Q
TC  Q S   CD
  
H
Where 2C is Price per unit
2DS
Q*
CH
• Three-step procedure can be used to solve the
quantity discount problem.
 Calculate the Q* for each price.
If the Q* is out of the range for the price level, use
the nearest point (nearest small quantity) possible.
Calculate the total cost of the system (not just
inventory system) to see which is lowest
C
Total Cost Including Purchasing Cost
p1
Cost
p2
p4
p3
0 EOQ Quantity
Q
p1
Cost
p2 p3 p4
0 EOQ Quantity
Q
p1
Cost
p4
p3
p2
0 EOQ Quantity
• The Soon Corporation is a multinational company that
purchases one of its crucial components from a supplier
who offers quantity discounts to encourage larger order
quantities.
• The supply chain manager of the company wants to
determine the optimal order quantity to minimize the
total annual inventory cost.
• The company’s annual demand forecast for the item
is 1,000 units, its order cost is $20 per order, and its
annual holding rate is 25 percent. The price schedule
is:
• The company’s annual demand forecast for the item is
1,000 units, its order cost is $20 per order, and its
annual holding rate is 25 percent. The price schedule
is:
• What is the optimal order quantity that will

minimize the total annual inventory cost for this
component
• What is the total annual inventory cost?
2DS
Q*
 CH
Where C is Price per unit
 D   Q
TC  S 
Q  
 CD

• D = 1000 Units
• S = 20
• H = 25%
• C= $5, $4.5,
$4.0
2DS
Q*
 CH
 D   Q
TC  S 
Q  
 CD

Order Quantity Price per Unit
501 - Above $ 4.00
Order Quantity Price per Unit 2DS

Q* 
201 - 500 $ 4.50 C H
Order Quantity Price per Unit

1 - 200 $ 5.00
• Now find out the TC for each Q*, calculated in the previous step.
Comparing the total annual inventory costs for A, B and C, the optimal
order quantity is 501 units, which qualifies for the deepest discount.
Radio Frequency Identification
(RFID)
• Bar Code
• The barcode has been used to identify the
manufacturer and content of a carton for
decades.
• Barcodes represented data by varying the
width’s and spacing's of parallel lines.
• Issues with bar-code
• It cannot store enough information to
differentiate goods at the item level.
• Direct line of sight is required to read a
barcode.
• The information stored on it is static
and not
updatable.
What these devices do?
optical barcode readers

(RFID)
• The optical barcode reader gathers the data by
collecting laser light reflection of the black bars
which represent a number.
• The gathered data is then sent to a database that
interprets the results (price of the item and the
serial number).
(RFID)
• BarCode
• Holds information nicely in the horizontal direction
• Less information storage capacity
• Can be read in one direction. Straight line of sight.
• QRCode
• Carry information two dimensional, horizontal as well as vertical.
• Carry up to some hundred times the amount of information than a
conventional barcode
• Conventional barcode can take up to ten times the amount of
printing space to carry same amount of information as a QR code
Radio Frequency Identification (RFID)
(RFID)
(RFID)
• Components of RFID
• RFID Tag
• RFID Reader
• Communication System
• RFID Database/ Software
• RFID tag consists of a computer chip and an antenna for wireless
communication
• The communication network connects the readers to transmit
inventory information to the enterprise information system.
• The RFID software manages the collection, synchronization and
communication of the data with warehouse management, and ERP
and stores the information in a database.
(RFID)
• RFID does not require direct line of sight to read a
tag, and information on the tag is updatable.
• RFID technology is also used in
 libraries,
 passport identification,
 animal tracking,
 medical discipline,
 toll payments and in many other fields
(RFID)
• There are two major RFID standards
• EPC (Electronic Product Code) standard

 EPCglobal Inc. Standards (GS1)
• The International Standards Organization (ISO)
 ISO18000 standard
• Wal-Mart Stores, Inc. and the Department of Defense are

the two largest adopters of RFID.
• Two types of tags
o Passive Tags: Do not store power on the tags.
o Active Tags: Have energy source/transmitter in tags
• The EPC standards call for six classes of
tags
• The current 96-bit EPC is a number made up of a header and three
sets of data.
• Header: 8-bit header identifies the version of the EPC being
used.
• EPC Manager: 28 bits identifies the manufacturer (and even plant)
of the product.
• Object Class: 24 bits identifies the unique product family.
• Serial Number: 36 bits uniquely identifies the individual physical
item being read.
(RFID)
• The 8-bit header can identify 256 (28) versions of EPC’s.
• The 28-bit EPC manager can classify 268,435,456 (228) companies.
• The 24-bit object class can identify 16,777,216 (224) product
families per company.
• The 36-bit serial number can differentiate 68,719,476,736 (236)
specific items per product family.
How RFID Automates the Supply
•Chain
It can synchronize information and physical flow of goods
across the supply chain.
• Materials Management:
o Provide handling,
o Routing and
o Storage information of the incoming goods.
o Inventory status can be updated automatically
• Manufacturing:
o Tracking
o Counting
o Monitoring
How RFID Automates the Supply Chain
• Distribution Center:
o Monitor inbound and outbound goods
o update the inventory automatically
o Retail Store:
o inventory status can be updated in real time
automatically
o Monitor inventory depletion rate
Mid – Term Course
Chapters: 1, 2, 3, 5, 7

Inventory Management

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Inventory Management

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Inventory Management

Dr. Umar Farooq

Date: 05–03-2020 (Thursday)

10 to 20% of inventory can be reduced

• Key Focus of inventory management is to control variable costs

Cost of Revenue (cost of goods sold)

 A items are given the highest priority. A

• How much to order?

• Inventory models has two categorize:

• Models use fixed parameters to derive the optimum order

Purchase Order Purchase Order

 If you order 1 microwave in a single order,

Holding cost (HC)

Ordering cost (OC)

Lot Size (Q)

Lets Find out the Formula of EOQ

o D = Annual Demand (Units/year)

• Total Cost = Holding Cost + Order Cost

• Only ordering and holding costs need to be

The number of orders placed/year = D/Q

• But inventory level continuously decreasing from maximum to

• Annual Holding Cost = Average annual Inventory × Holding

EOQ occurs when

Ordering cost = DQ(S)

• An item, a birdfeeder is also a top-selling item.

• Management has been ordering currently in lots of

When Q = 390 2 When Q = 75

How Much to Order?

• It finds out the optimal production lot size.

• It relaxes the instantaneous replenishment assumption by allowing

Batch 1 Batch 2 Batch 1 Batch 2

Lets Calculate EPQ

We have to find out;

Total Setup Cost = Number of Production run(batches) × Setup

Number of Production run = Annual Demand / Quantity per batch

Total Holding Cost =Average Inventory × Holding cost per unit

Average inventory = Maximum inventory/2

Production Production=Q/P Accumulating Production run

Imax = Maximum inventory

Average inventory = Imax /2

• Maximum Inventory = Q/P × (P-d)

• Average inventory = ½ [Q/P × (P-d)]

(D/Q) × C = ½ [Q/P × (P-d)] × H

HOW much to produce?

= 80 units per day

Annual Purchase Cost + Annual Holding Cost + Annual Order

Annual Order Cost + Annual Holding Cost + Annual Purchase Cost

• What is the optimal order quantity that will

Order Quantity Price per Unit 2DS

Order Quantity Price per Unit

optical barcode readers

• EPC (Electronic Product Code) standard

• Wal-Mart Stores, Inc. and the Department of Defense are

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